Dot Hill Stores Well

Dot Hill (HILL), a maker of data storage devices, reported a solid fourth quarter of 2008, in contrast to many equipment manufacturing in the data storage industry. Revenues were $72.4 million, down 5% sequentially from $76.6 million but up 40% from $51.8 million year-earlier. Dot Hill is still operating in the red, with GAAP losses of $8.6 million or $0.19 per share. That included a non-cash goodwill impairment charge, so on a cash basis they are getting close to break even.

Why the prosperity? Partly data storage equipment is a necessity, rather than a luxury, for modern enterprises. Every bit of data needs to be stored in an accessible manner, and data is generated in ever increasing torrents.

Dot Hill also has picked a pretty sweet space in the data storage arena. The firm was in disaster mode in 2006 and 2007. Most of its revenue were from sales to Sun, which was having its own troubles and then bought a different data storage company. Sun started phasing Dot Hill out. So the engineers at Dot Hill got busy and came out with a variety of new products designed to meet end user needs. HP and NetApp are now big customers, and a number of smaller OEMs are taking the Dot Hill products as well. Surprisingly, the business from Sun has fallen off more slowly than expected. Not only did customers want to build out the Dot Hill products they already had, but replacement parts has become a good business. Even the economic slowdown is helping, as some firms would rather just replace the drives in their Sun-Dot Hill systems than buy totally new equipment.

Of course if tech spending continues to dry up, Dot Hill could get hurt like so many other companies. HP closed the last two weeks of 2008, hurting revenues in the reported quarter. Q1 is traditionally a seasonally slow quarter for data equipment hardware. Management made it clear they don't really know what Q1 revenues will be, but threw the figures of $56 to $63 million to analysts. They said that was a cautious estimate, but it could still be too high in a worst case scenario.

Dot Hill had $56.9 million in cash at the end of the quarter. Management believes that as long as the economy is not too bad, they should be profitable on a non-GAAP, cash basis in the second half of 2009.

If the economy recovers at all, Dot Hill should be a very sweet play. It is an under $1 stock today, trading around $0.52 lately. I own some stock and intend to accumulate it (up to the maximum my portfolio model allows) at this price, presuming the equipment keeps selling.

Keep diversified!

More: My Dot Hill 2/26/2009 analyst conference summary
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